A budget is a plan for how you’ll manage your money by tracking the dollars you earn and spend. Rule número uno in making a budget is…do what works for you. Trying to use your BFF’s method of a spiral notebook with a bunch of colored tabs may not be the way to go, especially if you find it complicated and confusing. A budget is pointless if you don’t use it; it’s best to try a couple of methods to find the one you’ll use and stick with.
First things first, you need to think about your money goals. Knowing what you want out of your money will make creating a plan easier. Are you trying to reduce debt or save for a house? Do you want to spend less on going out to eat and more on lumberjack lessons (hey, it’s your money)? Write your goals at the top of your budget because an unwritten goal without a timeframe is just a dream (add cut-out magazine pictures to visualize your goal).
Most information you’re going to put in a budget is basic, what’s different is how you keep and track that info. To name some, there’s the good old-fashioned pencil and paper, a Microsoft Excel spreadsheet, an envelope system, or there are even websites that will help you create a budget. I recommend pencil and paper to start with—you can take it up a notch when you’re ready.
The talking’s done; now it’s time to actually make your budget. The two basic parts you’ll need are the money you’re bringing in and the money you have going out– your income and your expenses. At the top of your paper, under the goals, you wrote down (because you took what I said to heart), write and underline “Income”.
Under this heading list your monthly income, if you’re lucky enough to have multiple incomes, write them all down. Some examples are: job income, alimony, child support, a pension, social security, or unemployment. Next, write down and underline “Expenses” right underneath all your income. This is where you need to remember all your monthly expenses, and I mean all of your expenses. If you need to sit down crisscross applesauce in a sea of paperwork to sift through all your bills and paperwork, then do it.
The first item you want to list is savings—always pay yourself first. It ‘s important to remember all the expenses you pay each month. Here are some to jog your memory: car payment, electricity, car and medical insurance, lunch money, gasoline, and food. The last two I mentioned are variable expenses—this means they can be higher or lower each month. If you have no idea what you spend on those each month, take a look at your bank statements. These statements are helpful to look at your past spending to plan how you’ll manage your spending in the future.
Above, I talked about regular expenses, but it’s important also to discuss irregular expenses. A big error in making a budget is not accounting for items that don’t happen every month. Forgetting to add these expenses to your monthly budget can have a devastating effect if you’re living paycheck to paycheck. Most people don’t have their oil changed every month, your car’s registration renewal isn’t due every month, but they’re still expenses that need to be in your budget; this goes for birthdays and holidays, too, and let’s not forget to add satellite radio or Amazon Prime, either. Take each irregular expense and divide it by 12 to know how much to include in your monthly budget. Example: if your car registration is $75 per year, divide $75/12 equals $6.25. Now you put $6.25 in a savings account and by the time the bill is due, ta-da, you’ll have the money in your account.
Once you’ve listed your income and expenses, it’s time to see if you’re living on less than you make (that’s the goal) or you’re spending more than you make (we don’t want this). Total all your income and all your expenses then subtract your expenses from your income—this is the free cash you have each month. After you determine this number, you may want to go back and adjust some items for your budget. If you have excess money, then you may want to increase your savings or payments on debt. If you are overspending, go back and reduce your expenses to create extra money. This may mean no entertainment money or a reduction in your grocery spending, but remember it’s not forever—it’s just until your budget gets under control.
Don’t put off making a budget because you’re stressing about making it perfect. In the beginning, it’ll be a work in progress. The first month, you may find you’ve spent too much on groceries or that you aren’t spending as much on entertainment, but, no worries, improvements will come as you tweak your numbers each month. The most important point of all this is to not only SAY you’re going to make and follow a budget but actually to DO it!
Let me know some of your thoughts on budgets by sharing them in the comments below.